Green policy success rarely an all-or-nothing matter

Until recently, most managers would agree with Milton Friedman's dictum that "the business of business is business". But, increasingly, companies are being asked to shoulder responsibility for environmental and social issues, too.

A few weeks ago Sir Mark Moody Stuart, the chairman of Royal Dutch/Shell, underlined the change in attitudes when he launched an initiative called "Business Action for Sustainable Development". "We now want to take a seat at the table, listen to what other members of society have to say and discover what role we have to play in the development and delivery of a sustainable future," he said.

Companies that claim to have an environmental conscience are about to be put to the test. Will corporate concern for the environment survive a downturn? Or will it be seen as a distraction from the goal of survival? Even the strongest champions of corporate environmentalism acknowledge that a harsher economic climate would deter many businesses from launching new environmental projects.

Simon Webley, research director of the Institute of Business Ethics, believes that "new programmes that go beyond the regulatory requirements are likely to be pushed down the agenda". The effect will be most pronounced in smaller companies.

However, campaigners fiercely challenge the perception of many managers that corporate responsibility is a luxury that is affordable only when the business is going well. The campaigners argue that there is a sound business case for focusing on social and environmental issues, whatever the state of the economy. The United Nations Environment Programme and Sustainability, a consultancy, has just published a study entitled Buried Treasure: Uncovering the business case for corporate sustainability, which concludes that there is good evidence for the link between sustainable development and shareholder value. "The jury is in - overall, corporate sustainable development performance has a positive impact on business success," it asserts.

But the study also acknowledges that these positive links are generally only weak or moderate. Moreover, there is continuing difficulty in answering the "chicken and egg question", namely, are responsible companies more prosperous or do prosperous companies tend to be more responsible? Nonetheless, the study identifies many particular examples of companies that have lowered their costs or gained some other business benefit as a direct result of policies that promote sustainable development.

This conclusion is endorsed by many companies that claim they can profit from paying attention to environmental and social issues. Last month the Co-operative Bank published a cost-benefit analysis that attributed up to 18 per cent of its profits to ethical policies.

But putting an environmental issue at the heart of a corporate strategy is no guarantee of success. Iceland, the frozen-food retailer, was badly hit by its decision last year to sell only organically produced vegetables in its own-label range. It expected a 30 per cent rise in sales but found that customers bought less.

Some experts warn against generalising about the impact of environmental issues on profits. "There is no reason to believe that environmental performance is an equal driver of value across all sectors and industries. Nor is it reasonable to lump all environmental strategies together," says a study by the World Resources Institute, a US think-tank. "[Companies] aren't merely being green; they're being green because specific environmental actions make good sense."

A similar conclusion was drawn by Forest Reinhardt of the Harvard Business School, in a paper in the Harvard Business Review in July 1999. Mr Reinhardt rejects the simplistic, yes-or-no nature of the question "Does it pay to be green?", arguing that managers should treat environmental problems in the same way as they do any other business issue. He urges them to ask: "Under what circumstances do particular kinds of environmental investments deliver benefits to shareholders?"

Companies can integrate the environment into their business thinking in several ways, says Mr Reinhardt. They can differentiate their products from their competitors' and charge higher prices; they can help shape government regulations in a way that benefits their business; they can use environmental insights to cut costs; they can reduce the risk of accidents, lawsuits and boycotts and possibly rewrite the competitive rules in their markets. On this analysis, the question of whether a business will retain its environmental credentials in a downturn will depend on a company's strategy.

When Xerox, the copier company, came under severe pressure in the late 1980s, it found it could save hundreds of millions of dollars a year by taking back used machines and remanufacturing them to incorporate new technology. On the other hand, an attempt to introduce a premium "greener" product may come unstuck in a downturn because consumers are likely to be more resistant to higher prices. The intense interest in green issues in the late 1980s subsided in the recession of the early 1990s, as consumers became more concerned with finding value for money.

The experience of recent years has led many to assume that corporate awareness about the environment is on a rising trend, albeit dipping during times of economic slowdown. For instance, in spite of the trauma of the early 1990s, the awareness of environmental issues remained higher in those years than it had been before the surge in green consumerism in the 1980s.

However, sceptics are not convinced. Some commentators argue that the pressure on companies to adopt "green" credentials could prove a short-term trend. "It is myopic . . . to see the brief changes of the last five or 10 years as inevitable, irreversible and bound to continue," says Prof Christie Davies of the University of Reading and his colleague Dr Mark Neal in The Corporation Under Siege, published by the Social Affairs Unit.

They compare the apparently inexorable "greening" of companies with the perceived inevitability of nationalisation in the 1940s, of price controls in the 1960s and growing trade union power in the 1970s. Now, as then, they argue companies should resist trends that appear inevitable by fighting off regulatory pressures and single interest pressure groups.

More support for the sceptics comes from the majority of financial analysts, who continue to see corporate environmental performance as a moral rather than a mainstream business issue. Only a third of analysts consider that environmental issues might affect the value of their investments, according to a recent survey for Business in the Environment, a UK social responsibility campaign.

The best test of the business case for sustainable development is whether socially responsible companies outperform their peers. Here, the evidence is mixed. Although most "sustainable" funds put in a respectable - or even strong - performance for much of the 1990s, they were disappointing in 2000, when the Dow Jones Sustainability Group Index underperformed the FTSE World Index by 9 per cent.

Many funds did badly last year because they were overexposed to technology stocks. But some funds - particularly those invested in alternative energy companies - performed spectacularly well.

The mixed performance of the funds underlines the shifting relationship between business and the environment. The question of whether it pays to be green will depend on the company, its strategy and its circumstances. The success of green strategies is rarely an all-or-nothing matter.